But Knowing That Your Credit Scores Are Important Is Not Enough. Just Like It S Not Enough To Know What Your Temperature Is

Category: Finance, Personal Finance.

Just like a thermometer shows your temperature and helps you know when you re healthy or sick- your FICO credit scores tell you if your credit is healthy or in need of attention.

But knowing that your credit scores are important is not enough. just like it s not enough to know what your temperature is. The fact that you re reading this article shows you understand how important your credit scores are when it comes to your financial health. You have to know what" medicine" will make you healthier. When these two ways are combined they re a very powerful force to be dealt with. So, let me be very clear on two different ways you can increase your credit scores. The two primary ways to raise your credit scores are: Managing your credit( in other words, things you can do yourself) Removing inaccurate negative information from your three credit reports( usually best handled by a law firm that specializes in these matters) In this article, I ll focus on the first way- managing your credit. A change in how you pay your bills, when you pay your bills, when you apply for credit, what credit you apply for, etc. can send your scores sailing and impress your lenders.

Managing your credit means a lot more than just paying your bills on time. However, when the above actions are carried out incorrectly they can send your scores crashing to the floor. Did your parents teach you the right things about your credit? There s an art to managing your credit to increase your credit scores. Probably not. It s important that you understand most of what your parents taught you about how to manage your credit is wrong. because it doesn t translate into what works today. You see, credit scoring didn t become widely accepted until the late 1980s.

Sad, but true. Our parents and grandparents weren t" scored. " We are. Doing things the way your parents taught you would be the equivalent of buying a record player and trying to find a vinyl record of your favorite recording artist today. compared to buying an audio CD. When a credit check meant an index card and a handshake! Right or wrong. it seemed as though our local banker took Dad s reputation, church affiliation, character, and community involvement into the decision- making process. I can remember my father driving downtown to talk with his banker friend at Salem Bank in Goshen, Indiana. (Today the bank is called something else. ) What I remember most about my dad getting loans back then was that everything seemed to work on a" good ole boy" system. Sure, the bank looked at Dad s credit history. but it wasn t like it is today.

In fact, for a long time there weren t really any national credit reporting agencies. Credit reports didn t become widely automated until the early 1980s. They were all small local credit bureaus called" merchant associations. " The local merchants would share your payment history with each other. Through years of acquisitions, the small credit bureaus eventually became a part of what are now known as the three national credit reporting agencies. These merchant associations ended up becoming small local credit bureaus. Our local credit bureau in Goshen, Indiana back then wasn t even affiliated with a national credit reporting agency. and they kept our credit information on three- by- five index cards! I ll never forget the cranky local credit bureau employee walking to a file box full of index cards and removing my dad s credit file.

I remember back in those days Dad actually went to the credit bureau if he had questions about his credit. No computer. no internet. just file boxes and index cards! The system is highly impersonal now. That doesn t happen anymore. Credit scoring has taken the bias out of the lending decision. My father died at the age of 55, before credit scoring became widely accepted in the United States and before my first book, Credit After Bankruptcy was published. Why our parents advice about credit no longer works.

His sage advice to me was, "Pay your bills on time and everything will be OK. " And for the most part that was excellent advice, because that was all that mattered. before credit scoring was invented and became popular. The majority of what makes up your credit scores has nothing to do with how you pay your bills. But today there s more to it. How you pay( or don t pay) your bills accounts for only 35% of what makes up your credit scores. That means that 65% of what makes up your credit scores has nothing to do with paying your bills on time! Do the math.

Understanding where that 65% comes from and knowing how to properly manage these other factors is the key to increasing your credit scores- fast. For instance: - Only you decide how much of a balance to leave on your credit cards each month. - Only you decide how and when to apply for credit. - Only you decide to work with mainstream lenders instead of finance companies. - Only you decide if you tap your home s equity with a line of credit or home equity loan. - Only you decide how many inquiries appear on your credit reports, etc. The good news is, within this 65% are actions that are largely within your control. You make these and other credit decisions every week. Four quick actions you can take right now to increase your credit scores. And these credit management decisions determine 65% of what makes up your credit scores.

Whenever you apply for mortgage or auto- related credit, always do it in a 14- day period to minimize the damage of the inquiries to your credit scores. Increase the credit limits on your revolving credit cards. (But make sure you don t increase your spending! ) Figure out a way to pay off your credit cards each month. These types of credit inquiries, if made within 14 days of each other, will count as only one inquiry in your credit scores. Only work with banks, credit unions or captive lenders that report to all three national credit reporting agencies. Pay close attention to the types of lenders that appear on your credit reports. No finance companies!

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